• Mixed 3QFY15 results
• Fuel savings more visible in FY16
• Increase FV; maintain HOLD

Foreign exchange and hedging losses drag on results

Singapore Airlines (SIA) reported a mixed set of 3QFY15 results. Excluding Tiger Airways’ (Tigerair) consolidation, revenue grew 1% YoY to S$3.9b on higher passenger revenue as yields increased 2.7%. Average jet fuel cost for 3QFY15 was 19.6% lower before hedging but declined only 1.9% after hedging due to hedging loss of S$212.3m. However, the strengthening of USD against SGD resulted in a net 0.6% YoY increase in fuel costs to S$1.4b. The 1.7% YoY growth in other expenses excluding fuel costs to S$2.4b was also largely due to the strengthening of USD against the SGD as well as higher aircraft depreciation. Consequently, 3QFY15 operating profit dropped 5.3% YoY to S$143.0m. 3QFY15 core PATMI rose 12.6% to S$146.4m as contributions from associated and JV companies turned positive to S$23.6m compared to loss of S$24.1m a year ago. Excluding exceptional items, 9MFY15 core PATMI declined 27.8% to S$282.2m and formed ~78.8% of consensus FY15 forecasts.

Fuel savings more visible but several factors limit effect

With 65% of 4QFY15 jet fuel needs hedged at ~US$116/barrel, we think fuel savings will be more visible in FY16 as SIA reported lower hedging exposure of 19% at US$114/barrel for jet fuel and 18% at US$98/barrel for Brent crude oil. However, we believe there are several factors that work against the potential savings: 1) our projections for FY16 yields remain relatively flat as we expect intense competition to persist on overcapacity without significant growth in air travel demand, 2) we expect to see one-off charges to SIA in FY16 as it reconfigures current aircraft cabins that are not fully depreciated with premium economy seats; although capacity will reduce, yields may see slight improvement, and 3) strengthening of USD against SGD is expected to continue to drag FY16 results given that most of its expenses are in USD (e.g. fuel costs, aircraft leases etc).

Increase FV; maintain HOLD

Factoring in 3QFY15 results, hedging positions for FY16 and the above factors, our overly conservative FY15/16F PATMI forecasts increase by ~42%/53%. Consequently, based on 1.1x FY16 P/B (5-year mean), our FV increases from S$10.80 to S$11.59. Maintain HOLD.

Source: OCBC Research - 10 Feb 2015